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How Much Should You Borrow for College?

March 30, 2018
Loans, Student Loans
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Choosing how much to borrow for college requires you to forecast your future.

You need enough to cover school costs without taking on a monthly payment that would bury you. You’ll have to consider:

  • The gap you have to fill
  • What that debt will cost every month
  • Whether you can afford that payment

The average undergraduate debt is about $30,100, according to The Institute for College Access and Success. That might be a hard-to-grasp number while you’re still in school. Think instead of monthly payments. On a standard 10-year repayment plan, that’s about $319 a month.

How much of your income should you spend on student loans?

One oft-quoted rule of thumb is you should never borrow more than you expect to earn in your first year out of college. That’s too high for most borrowers.

The average salary for new bachelor’s degree holders is just over $50,000, according to the National Association of Colleges and Employers. After federal taxes, that’s about $2,792 in monthly take-home pay.

A borrower who takes on $50,000 in loans would see a monthly bill around $530 per month — more than 19% of her after-tax income. Factor in other expenses, such as housing, food, transportation, state taxes and savings, and that bill would be a stretch for most borrowers to meet. (Use a paycheck calculator to see what your take-home pay would be in the state where you live.)

A better rule of thumb is to aim for student loan payments that don’t exceed 10% of projected after-tax monthly income your first year out of school. A borrower who expects to make $50,000 a year would borrow no more than about $26,000 to stay under that threshold. This rule of thumb returns a manageable, conservative estimate for borrowers who don’t expect their wages to increase dramatically.

Students considering professions such as business analyst, attorney or registered nurse — who may need to borrow more to pursue advanced degrees, but whose eventual incomes could climb more quickly — may have to do more complex calculations.

For the most precise way to figure out how much to borrow, follow the four steps below the payment affordability calculator.

Student loan affordability calculator

The amount you borrow will depend on how much you owe your school after subtracting free aid and savings.

Find the net price. Start by adding up the total cost of your education, according to your school’s net price calculator. This includes tuition and fees, room and board, books and supplies, transportation and any other education costs.

Maximize free aid. Submit the Free Application for Federal Student Aid, or FAFSA, to see how much free aid you qualify for. Free aid could include grants, scholarships and work-study. Subtract any free aid you received, along with savings you plan to use.

Calculate the payment gap. Add up all the free aid you’re eligible for along with any savings you plan. Then, subtract that amount from the total cost of your education.

The amount left over is how much you might need to borrow. The FAFSA will tell you what federal loans you qualify for. After that, you can get private loans from a bank, credit union or online lender. Begin with federal loans, which offer more borrower protections than private loans.

Don’t forget future price changes. The total cost of attendance at your school may change from year to year, so you may need to borrow a higher amount in the future. Expect tuition, fees and room and board to rise by about 2.7% annually for public four-year schools and 2.2% for private nonprofit four-year schools, according to the College Board.

Your payment gap may also widen in upcoming years if you get less free aid. This tends to happen when colleges front-load awards in your first year, such as scholarships.

How much you can borrow in federal loans. Federal loans are not limitless. The maximum you can borrow depends on the loan type and your status as a dependent or independent student.

Dependent Undergraduate
First year$5,500 overall; $3,500 subsidized
Second year$6,500 overall; $4,500 subsidized
Third year and up$7,500 overall; $5,500 subsidized
Total limit$31,000 overall; $23,000 subsidized
Independent Undergraduate
First year$9,500 overall; $3,500 subsidized
Second year$10,500 overall; $4,500 subsidized
Third year and up$12,500 overall; $5,500 subsidized
Total limit$57,500 overall; $23,000 subsidized

Graduate students can borrow unsubsidized loans or graduate PLUS loans. Learn more about borrowing limits for graduate students.

How much you can borrow in private loans. Typically, private lenders have six-figure lifetime limits. But the amount you’re allowed to borrow in each loan period can’t exceed your school’s total cost of attendance.

The amount you owe when repayment begins will depend on the amount you borrowed, the type of loan and its interest rate:

Subsidized federal loan. The government pays your interest while you’re in school and during the six-month grace period. The total you owe at repayment is the amount you borrowed.

Unsubsidized federal loan or a private loan with deferred repayment. You must repay the interest that accrues while you’re in school. It will capitalize and be added to your loan total when repayment begins, usually six months after leaving school. Your loan total will be higher than when you originally borrowed.

Here’s an example of how it works if you borrowed an unsubsidized student loan in your freshman year of college.

Amount borrowed: $5,500 in federal direct unsubsidized student loans
Interest rate: 4.45%
Length of time in college: Four years
Total interest accrued: $1,085 while enrolled and during the six-month grace period
New total owed: $6,585 with the capitalized interest
Monthly payment amount: $68.09 a month on a standard 10-year repayment plan.
Estimate your own monthly payments using a student loan payment calculator.

You may consider paying the interest while in school or before repayment begins to prevent it from capitalizing. It would also lower your monthly payment amount.

Estimated monthly payments are only affordable if you earn enough to pay the bill. While you can’t predict exactly how much you will make, you can estimate salaries from different occupations you’re interested in. Use resources like the U.S. Department of Labor’s Occupational Outlook Handbook.

Monthly payment affordability will also depend on how much your future living expenses will cost. Estimate the cost of financial necessities, such as housing and transportation, with a cost-of-living calculator.

Set your income as a base and subtract estimated costs of living and the estimated monthly student loan payments to find out if the loan amount is reasonable — that is, 10% or less of your monthly take-home pay.

Consider all of your school options

The debt you take on to pay for school is within your control. You may find out your estimated income after graduation wouldn’t support monthly loan payments needed to attend your first-choice school. In that case, you may want to consider less expensive schools to save yourself from a debt burden you can’t shoulder.

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